Despite relatively low mortgage rates, U.S. applications for home loans dropped last week as a decrease in purchasing activity offset an increase in refinancing activity, an industry group said on Wednesday.

The Mortgage Bankers Association (search) said its seasonally adjusted index of mortgage application activity declined 3.0 percent to 587.8 in the week ended Jan. 7, after falling 10.6 percent in the MBA's prior week survey.

This is the lowest level the index has touched since the week ended June 25, 2004, when the index was at 575.0.

An uptick in mortgage rates (search) may have suppressed demand for home purchases in the first week of 2005.

Fixed 30-year mortgage rates (search) averaged 5.70 percent last week, excluding fees, up 3 basis points from 5.67 percent the previous week.

Rates, however, are comparable to where they were several months ago, yet the index was substantially higher back then. In the week ended Nov. 12, 2004, fixed 30-year mortgages rates were the same and the MBA's market index stood at 758.3.

In fact, fixed 30-year mortgage rates were as high as 6.34 percent in the week ended June 11, 2004, but the market index was only slightly higher than where it stood last week at 600.6.

"A rebound from a holiday-related slowdown, which we expected, has not occurred," Citigroup said in commentary Wednesday morning.

The MBA's purchase index, a gauge of loan requests for home purchases, hit its lowest level in over a year. The index decreased 5.8 percent last week to 393.1, adding to the 13.7 percent loss the previous week. The purchase index is now 13 percent lower than a year ago raising concerns that the housing market may have topped out.

"A further drop in the purchasing index will likely prompt additional concern about the strength of the housing market. If there is another week of weak data, (this) combined with recent (housing) starts and home sales data will raise many questions about whether the housing boom has ended," said Drew Matus, senior financial economist at Lehman Brothers.

The MBA's seasonally adjusted index of refinancing applications reached increased 1.1 percent to 1,720.5, offsetting some of the 5.7 percent drop the prior week.

"Refinancings are generally less affected by seasonal factors than home sales," Citigroup said. "However, this December refinancing activity was much lower than in November and October, most likely because of the holidays and uninspiring mortgage rates."

Refinancings made up 49.0 percent of all mortgage applications last week, up from 48 percent the week before.

Applications for adjustable-rate mortgages (search), meanwhile, edged up slightly to 32.7 percent from 32.6 percent of total applications.

One-year adjustable-rate mortgage rates averaged 4.16 percent, down from 4.17 percent one week earlier.